Allocation Apportionment Reviews

How Is Your Business Income Sourced?

Do you know the difference between allocating and apportioning income?

The first one, allocation, means that “100% of the income is sourced to a single place.” The other, apportionment, takes a state specific cocktail of numbers to come up with a percentage to then be multiplied by income. Very different, right? And yet, to most tax people without a SALT specialization, they are considered to be the same thing.

One of the most challenging areas of income and related types of taxes is how you source your income. Some kinds of income are allocated and some are apportioned. It can the case that the "100% apportionment" and the "cocktail apportionment" have the same result (e.g. all income is sourced to one state), but that is definitely not true all the time.

Knowing when to allocate vs. apportion your income to states as well as determining sourcing for payroll, property, and sales can become quite complex depending on your business model. Not to mention, states are always changing their rules and the rules are not consistent nationwide. Some states even disagree as to whether a particular piece of income should fall under their allocation or their apportionment rules. Ohio is a great example of this with its new Business Interest Deduction.

Contact our Business Tax Professionals

Reach out to Rea’s SALT team if you have questions on whether or not the apportionment methodology that’s been used in the past for your returns is correct. The results of our apportionment review can help you identify areas of risk, enable you to correct prior year returns, be compliant on a go-forward basis, and even lead to you getting a nice refund!

Often in looking at these issues, we perform a reverse income audit on your prior tax returns.